Equity & Trusts - Trusts and Insolvency
Customer Prepayments
STEP 1: Will a valid trust be found to exist over the claimant’s money? Go
through the usual requirements.
By putting customers’ money into a separate bank account, X may have created a trust
over customers’ money. If customers have made a prepayment, a trust can be used to
protect their money (Re Kayford; Re Goldcorp Exchange Ltd).
X was attempting to prevent the customers becoming ordinary creditors in an instance
of insolvency. As beneficiaries under a trust, they would have a proprietary interest in
this money, and would be able to reclaim it ahead of the company’s ordinary creditors.
[ONLY IF RELEVANT] What motivates companies to set up trusts?
Also, as a director, [INSERT DIRECTOR SETTING UP TRUST] may have to contribute
from his personal wealth if he has not taken all possible steps to minimise risk to
creditors (s.214 Insolvency Act 1986).
Is there a valid trust?
The following must be satisfied for a valid trust to exist over customers’ money:
- The three certainties (Knight v Knight);
- The beneficiary principle; and
- The correct formalities for declaration.
Certainty of intention
There must be certainty of intention to create a trust for customers, which can be
inferred from (as per Re Kayford):
- Payment of customers’ money into a separate bank account;
- Evidence that the company’s accountants had advised the above, in order to
protect customer’s money; or
- The company need not expressly state that the bank account was to be held on
trust for customers, if evidence of such intention existed otherwise.
- The separate bank account holding money on trust for customers need not be
labelled ‘customer’ or ‘trust’ if it is clear by conduct (i.e. by setting up the separate
, bank account) that is what the company intended to do (Paul v Constance,
applied in Re Kayford).
- A deed of trust provides evidence of certainty of intention (Re Farepak Food and
Gifts Ltd).
Certainty of subject matter
[INSERT THE CUSTOMERS’ MONEY] placed in a separate bank account constitutes
certain subject matter (Re Lewis’s of Leicester Ltd).
- OR: There will be uncertainty of subject matter if money is not segregated from
other funds by being placed in a separate bank account (Mac-Jordan
Construction Ltd v Brookmount Erostin Ltd)
[ONLY IF CHATTELS / SHARES, NOT MONEY] One cannot create a trust over an
undifferentiated mass of property. The company must keep customers’ property
separated for certainty of subject matter, e.g. in a different account (Re London Wine
Company (Shippers) Ltd).
- For example, where specific gold ingots had not been assigned to customers, as
the stock of bullion was constantly traded, there was no intention to create a trust
over the bullion for the customers and it was unclear which ingots belonged to
the customers. The trust failed due to lack of certainty of subject matter and
intention (Re Goldcorp Exchange Ltd).
- Distinguished from Re London Wine, a company can create a valid trust over a
percentage of property if the subject matter comprises intangible assets such as
identical company shares (i.e. not chattels) (Hunter v Moss).
Certainty of objects
As this is an attempted fixed trust, the complete list test applies. It must be possible to
draw up a comprehensive list of each and every beneficiary (IRC v Broadway Cottages
Trust). Conceptual and evidential certainty are required.
Conceptual certainty
Can the group be defined? Normally customers who have already paid. NOTE: these
The settlor must define the objects using clear concepts so that the trustees know what
type of person they are looking for.
Customer Prepayments
STEP 1: Will a valid trust be found to exist over the claimant’s money? Go
through the usual requirements.
By putting customers’ money into a separate bank account, X may have created a trust
over customers’ money. If customers have made a prepayment, a trust can be used to
protect their money (Re Kayford; Re Goldcorp Exchange Ltd).
X was attempting to prevent the customers becoming ordinary creditors in an instance
of insolvency. As beneficiaries under a trust, they would have a proprietary interest in
this money, and would be able to reclaim it ahead of the company’s ordinary creditors.
[ONLY IF RELEVANT] What motivates companies to set up trusts?
Also, as a director, [INSERT DIRECTOR SETTING UP TRUST] may have to contribute
from his personal wealth if he has not taken all possible steps to minimise risk to
creditors (s.214 Insolvency Act 1986).
Is there a valid trust?
The following must be satisfied for a valid trust to exist over customers’ money:
- The three certainties (Knight v Knight);
- The beneficiary principle; and
- The correct formalities for declaration.
Certainty of intention
There must be certainty of intention to create a trust for customers, which can be
inferred from (as per Re Kayford):
- Payment of customers’ money into a separate bank account;
- Evidence that the company’s accountants had advised the above, in order to
protect customer’s money; or
- The company need not expressly state that the bank account was to be held on
trust for customers, if evidence of such intention existed otherwise.
- The separate bank account holding money on trust for customers need not be
labelled ‘customer’ or ‘trust’ if it is clear by conduct (i.e. by setting up the separate
, bank account) that is what the company intended to do (Paul v Constance,
applied in Re Kayford).
- A deed of trust provides evidence of certainty of intention (Re Farepak Food and
Gifts Ltd).
Certainty of subject matter
[INSERT THE CUSTOMERS’ MONEY] placed in a separate bank account constitutes
certain subject matter (Re Lewis’s of Leicester Ltd).
- OR: There will be uncertainty of subject matter if money is not segregated from
other funds by being placed in a separate bank account (Mac-Jordan
Construction Ltd v Brookmount Erostin Ltd)
[ONLY IF CHATTELS / SHARES, NOT MONEY] One cannot create a trust over an
undifferentiated mass of property. The company must keep customers’ property
separated for certainty of subject matter, e.g. in a different account (Re London Wine
Company (Shippers) Ltd).
- For example, where specific gold ingots had not been assigned to customers, as
the stock of bullion was constantly traded, there was no intention to create a trust
over the bullion for the customers and it was unclear which ingots belonged to
the customers. The trust failed due to lack of certainty of subject matter and
intention (Re Goldcorp Exchange Ltd).
- Distinguished from Re London Wine, a company can create a valid trust over a
percentage of property if the subject matter comprises intangible assets such as
identical company shares (i.e. not chattels) (Hunter v Moss).
Certainty of objects
As this is an attempted fixed trust, the complete list test applies. It must be possible to
draw up a comprehensive list of each and every beneficiary (IRC v Broadway Cottages
Trust). Conceptual and evidential certainty are required.
Conceptual certainty
Can the group be defined? Normally customers who have already paid. NOTE: these
The settlor must define the objects using clear concepts so that the trustees know what
type of person they are looking for.
